HECM Changes: Two risks remain

Few are asking an underlying question that will shape every effort to curb future losses or HECM claims against the Federal Housing Administration’s Mutual Mortgage Insurance Fund. That question is if the Home Equity Conversion Mortgage is a true mortgage loan or a social program. On its face many would answer- of course, it’s a mortgage loan. Mortgage loans by their very nature are designed to mitigate risk over time. The reverse mortgage being a collateralized loan solely dependent on the remaining equity at loan termination seeks to the reduce risk of losses by adjusting loan proceeds based on the age or life expectancy of the youngest borrower. But there are two other risk factors that may be eroding the economic value of the Home Equity Conversion Mortgage: the assumed annual 4% appreciation rate and deferred property maintenance

Shannon Hicks - Shannon is the President of Reverse Focus, Inc. He draws from his experience as a reverse mortgage originator and prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he began podcasting and in 2010 with weekly video updates. He has spoken nationally at industry events and is host of the nation’s only weekly podcast for reverse mortgage professionals “Reverse Focus Weekly”. For more information, call 1.800-805-9328 x 3-3 or visit www.ReverseFocus.com .

The MMIF is divided into two parts: HECMs and all other mortgages (forward mortgages). The cumulative net results from the forward mortgages is more positive than the cumulative net results for HECMs is negative. There is NOT one year that HECMs have been positive in the MMIF according HUD’s Annual Report to Congress on the Financial Status of the MMIF for the fiscal year ended 9/30/2017.

So please describe how and why we see the same risks for the MMIF coming from forward mortgages as coming from HECMs? I have never heard that HUD is worried about the results of forward mortgages in the MMIF in the past three fiscal years. The only times I have heard about that is when then Commissioner Galante was playing with the Annual Reports by moving forward mortgage positive results to the HECM results. As a result I have little respect for her administration of the MMIF.

There is a lot I could go into but why? The results from each category in the MMIF under the current administration speak for themselves. My advice is for you to read the Annual Report for last fiscal year so that you are better prepared to read the Annual Report for fiscal 2018 that should be released in 40 days or so. NRMLA is so concerned about that report, that it has its practice of having a mid November Convention (the time when the annual report is normally released) to having a late October Convention.

Your comments are appropriate, but I think HUD has seriously missed some things.

On the appraisal issue, if HUD thinks their database is accurate, why not publish the database number, let the borrower use the number from HUD’s database, and save the cost of the appraisal. If the borrower wants to challenge the database number, then order an appraisal. HUD won’t allow this because they know their data is bad. HUD wants to intentionally drive appraised values down instead of getting as accurate a value as possible. They refuse to prosecute bad appraisals, either high or low.

Many of the problems associated with HECM product could be helped if there was a requirement for a POA to be in place. Recognize the fact that a HECM borrower may have capacity to make good decisions at the time the loan is originated, but 40 or more years later, the borrower’s capacity may be significantly diminished both physically and mentally. According to the Alzheimer’s research people at Anschutz Medical Center about half the population is dealing with some form of dementia at age 85. Many HECM borrowers will be in these homes well past age 85. Many have no children or other close family. HUD does not acknowledge the facts concerning these issues. Changing appraised values and principal limits does not address these issues. A borrower who is frail and/or dealing with some form of dementia is not going to do a good job of maintaining a home. They need help, not condemnation. HUD needs to be working with various other resources to address this issue.

Some problems with HECM foreclosure is the result of not having a personal representative in place. I see cases where properties with equity are foreclosed because the servicer has no other option. Requiring that the borrower maintain a defined personal representative would mean someone is available to deal with the property when the borrower dies. HUD does not seem to acknowledge that it is difficult for dead people to sell the property and pay off the loan. HUD does not acknowledge that some borrowers have no children or close family. HUD does not acknowledge that some borrower’s family have neither the legal understanding nor the money to hire a lawyer to probate a property. There are cases where a little understanding and help for the family would get better results than bullying.

Some foreclosures could be avoided it HECM loans turned into non-qualifying amortizing loans when they come due. I am seeing heirs who live in distant locations or heirs who have no recent job history because they have been care givers losing significant equity because properties are foreclosed before they can deal with a sale or refinance. Give them the option to make payments, and HUD may collect all the money instead of losing money on an unnecessary foreclosure. If the payments are not made on time, HUD is no worse off. They still foreclose the property. If payments are made on time, why does HUD care who makes them?

HUD treats these properties as if the HECM is the only lien on the property. This may be true in some cases, but it is also false in many cases. There may be government liens for home repairs, or deferred taxes. The big one is a Medicaid estate recovery lien. Medicaid does not make it easy to determine the amount of their lien. In many cases, homes are foreclosed because the Medicaid estate recovery lien exceeds the value of the property. In these cases, the appraisal, principal limit, or underwriting guidelines are not relevant. Foreclosure is a valid business decision for the heirs because the Medicaid lien exceeds the property value. HUD seems to ignore the fact that many borrowers will go on Medicaid after receiving a HECM. Why would heirs open probate if all the proceeds of sale will go to others?

The above is just a few of the issues HUD ignores concerning HECM products that create foreclosures and losses. These are affected by principal limit factors or appraisal issues.

Any change in NRMLA’s convention date from November to late October is due to hotel and meeting space availability and nothing else. The comment above is typical of the uninformed commentary by some individuals who feel they are knowledgeable about topics relating to NRMLA, HUD and many HECM issues when, in fact, they are far off the mark.

I do not know how you are so sure what I meant when I wrote about the choice of the timing of this year’s convention since my sentence lacked a key verb. Here is what I said again: “NRMLA is so concerned about that report, that it has its practice of having a mid November Convention (the time when the annual report is normally released) to having a late October Convention.” If you guess that I meant to add the word “changed” after “has” you are 100% right; perhaps for you it is nothing more than stating the obvious.

Here I was thinking that NRMLA had given thoughtful consideration to the confusion and wild reactions we read and heard about last year’s annual report from those attending last year’s convention and decided to convene in a time other than when the annual report is posted so that a better response could be composed to that report this year outside of the time demands of the convention by NMRLA Board members and attendees alike and chosen a date before the report is expected to be posted. My mistake, I should have known better.

My sincere apologies to you and to the Board at NRMLA for making such an assumption.

Perhaps it is time that we finally make the decision about the purpose of a HECM. Decide whether is is an economic program or a social program. Perhaps it should be both. I know it is unpopular to look at other decisions made by the government, specifically the military. But, we have the money to spend over 1.3 trillion dollars this year in military and military related spending, more than all other nations combined. That is in one year. And no one blinks an eye. It doesn’t even make a blip on our collective radar. The losses to the HECM program fade into insignificance. I believe the price of 2 new aircraft carriers would more than cover it.